What is a Dynasty Trust and is it good for the Economy and Democracy?

A well-designed and well-managed dynasty trust is an engine of economic growth and stability, protects its beneficiaries from the vagaries and tyrannies of corporate and governmental managers, and enables the freedom of critical thought and honest conduct, the essence of a republic.

Dynasty trusts can take many forms, but a common characteristic is that trust assets accumulate and are used for the benefit of trust beneficiaries free of estate taxes and freedom of generation-skipping transfer taxes for many generations, or even perpetually.

According to Investopedia.com

A dynasty trust is a long-term trust created to pass wealth from generation to generation without incurring transfer taxes, such as the gift tax, estate tax, or generation-skipping transfer tax (GSTT), for as long as the assets remain in the trust. The dynasty trust’s defining characteristic is its duration.

In an article published in the New York Times in July 2010, Ray D. Madoff, a law professor at Boston College, warned that increasing the use of so-called dynasty trusts would create an American aristocracy. Americans prefer a meritocracy over the nobility, Madoff wrote, and he then proceeded to repeat some of the usual jargon-filled arguments against trusts without considering their societal benefits.

Prof. Madoff implies that the United States today is a meritocracy. Meritocracy must be a system that rewards its members based on their ability to extract wealth from the economy, regardless of the social, moral, and economic costs of their activities. It seems present-day meritocrats, the experts, are adept at pursuing recognition, superiority, and money, but fall short of performing excellent work. The pay of public school teachers is typically based on the number of college credits they accumulate, not teaching performance. The dependence of professional politicians on donations and perquisites is well documented. The subservience of journalism and scholarship to prevailing popular thought and commercial considerations is an accepted, unfortunate fact. For example, legislators, government regulators, and private-sector employees involved in deep-water oil drilling and the failed investment banking industry seemingly achieved professional success and were paid well, but caused significant damage. After September 2001, politicians, academics, clergy, and journalists failed to analyze the U.S. Government’s policies and actions regarding the passage of the Patriot Act, the occupations of Iraq and Afghanistan, the secret rendition of kidnapped prisoners, and the war against Islamic militant critics. But, they were well paid for their complacency and complicity. For decades, politicians, scholars, and journalists have shamelessly failed to debate the plausible idea of U.S. Support of authoritarian regimes, such as Egypt, Jordan, Saudi Arabia, in the Middle East. And U.S. Support of the Israeli Zionist regime. thewemeritocratsalth Accordingly, the actions and omissions of the failed class of corporate-funded politicians and intellectuals-for-hire undermine the national security of the U.S. And the personal safety and freedom of its citizens. Yet, corporate and governmental paymasters regularly reward the unworthy conduct mentioned here with big paychecks and thereby maintain the compliance and conformity of the meritocrats. The dynamic of parasitic, subservient, mercenary behavior being rewarded with economic success might represent social Darwinism, but it takes the merit out of meritocracy.

A proliferation of dynasty trusts would enable an increasing number of citizens to act morally and responsibly because they would have an independent source of material support. One can only guess how many otherwise honest and intelligent people fail to act according to their conscience, or worse, act contrary to their values because they fear retaliation from an employer or a wealthy sponsor. Most people today have to earn a living, that is, they are not financially independent, and the more educated and specialized they become, the fewer job choices they have. For example, a climate researcher working in a government agency has minimal options to use. If he is fired by his bureaucratic superior for publishing a politically unwelcome report, then he might soon be gathering shopping carts at the local supermarket parking lot and unable to support his family. The same is true, to a greater or less extent, for engineers, teachers, journalists, and just about everyone else who is an employee or depends on public or private goodwill for his sustenance.

Of course, lots of good, honest work is being performed in society, but too little is done that challenges the vested interests of the selfish and profit-driven.

One could argue that many of the people who truthfully challenge self-serving myths and corrupt practices are supported directly or indirectly by independent sources of wealth. For example, the independent journalists and authors who succeed in exposing thewemeritocratsalth lies and corruption are often the benefactors of a few, enlightened wealthy individuals and their charitable foundations. They earn sponsorship through their merits, and arguably, therefore, are meritocrats. Their financial support comes from privately accumulated and privately controlled wealth, not from taxes or popular commercial interests. In other words, a dynasty trust itself can be an independent source of funds for supporting important societal work that would never receive funding from the conventional establishment.

Consider how much more vibrant and truthful our public discourse would be. How much more efficient and responsible our governments would be if people could speak and act without needing to worry about being fired from their jobs and losing their material livelihood. More dynasty trusts would mean more people being insulated to some extent against the purely mercenary rules of economic Darwinism. Of course, dynasty trusts are no guarantee of moral, truthful, responsible behavior. On the other hand, the current circumstances in which corporate wealth and populist myths influence personal and professional decision-making make inefficient and corrupt social behavior inevitable.

Many of the so-called founding fathers of the American republic inherited wealth and were arguably aristocrats. Aristocracy means rule by the best, not rule by the few (oligarchy) or control by the mean and corrupted. A proliferation of dynasty trusts could indeed lead to the creation of a privileged class, a class of individuals who have the privilege of not being yoked to an economy that is increasingly centralized, mercenary, and subject to decision-making based on maximizing profit or perpetrating lies and myths. As a practical matter, hard work and ingenuity alone are seldom enough to guarantee the livelihood of an individual and his family. The material existence of workers at all levels of society is increasingly subject to the arbitrary will of a manager who thereby wields an excessive amount of power over the actions of the worker. But, the beneficiary of a dynasty trust can resist the will of a manager (or client or political lobbyist or commercial sponsor or spin doctor) because he is not economically dependent on him.

Variants of dynasty trusts include a life insurance policy. Because the insurance company lobby is so influential in national and state legislatures, life insurance proceeds in an irrevocable life insurance dynasty trust are exempt from income and estate taxes. Thus, the combination of a life insurance policy owned by an irrevocable life insurance dynasty trust can provide tax-free growth of assets, payment of insurance proceeds to the trust free of estate taxes, and increased financial sovereignty for generations.

The logic of the recent N.Y. Times article seems to be that it is better for society as a whole if the custodians of wemeritocratsalth are forced to squander it within two generations, rather than protect it, preserve it and make it grow indefinitely. A common complaint of economists is that publicly-held corporations focus on quarterly or annual financial results, rather than on long-term business growth. Closely-held and family businesses, on the other hand, are valued (at least in principle) for their ability to make business decisions that enhance long-term business viability. As a practical matter, however, unless a private business is held in a trust, it generally disappears, either because of division among heirs or because estate and generation-skipping transfer taxes compel its sale. A dynasty trust provides a vehicle for accumulating and preserving wealth in an increasingly centrally-managed economy controlled by large corporations, government (national and local) monopolies, and popular myths. Although a dynasty trust does not pay inheritance taxes, a trust-owned business must pay income taxes on trade and investment income. There is no free tax ride for trust-owned enterprises. A trust, however, provides the long-term stability and continuity necessary for building a business culture based on honesty, service, quality, and tradition.

Critics of dynasty trusts raise some legitimate concerns. One is that an individual who does not need a particular job to survive will be prone to insubordination. A related matter is that beneficiaries of dynasty trusts will cease contributing to society because they no longer need work to survive. An additional concern alluded to above is that dynasty trusts could create a privileged class of aristocrats that uses an unfair advantage to rule the less privileged. The hard facts of reality ultimately outweigh or negate these concerns, which will be addressed in detail in a future article. Let this article end here, however, with the idea that a society filled with subservient, economically beholden sycophants having no financial sovereignty are a greater danger to the republic than the risk of an economically privileged aristocracy. A general benefit of dynasty trusts for all of society is the financial independence of trust beneficiaries from the tyranny of increasingly centralized economic control and manipulated public opinion, which independence enables freedom of expression and honest, virtuous behavior in a morally corrupt body politic.

Source by Thomas Swenson, Esq.